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Concerns arise as taxman invokes GAAR to question

domestic deals
BY SACHIN DAVE & SUGATA GHOSH, ET BUREAU | UPDATED: DEC 24, 2018, 12.01 Post a Comment
AM IST

Mumbai: For years, the General Anti-Avoidance Rule (GAAR) has been a tool in the
taxman’s hands to go after foreign investors — particularly offshore fund managers
—escaping tax by setting up letterbox companies in tax havens.

Foreign portfolio investors trading on Indian stock exchanges were told to pay tax as
paper firms lacked substance.

But with tax havens slowly losing their charm and tax treaties between countries
tightening, Indian tax officials are throwing the GAAR rule book at domestic companies
they suspect are striking deals to evade tax.

GAAR also relates to sale of capital assets where

In the past year, several notices have been served to local companies, with the Income the buyer makes an immediate part payment, with
Tax (I-T) Department invoking GAAR to question transactions such as mergers, deferred the agreement that the balance would be paid after

payment on deals and the way capital assets are sold, among other things. certain conditions are fulfilled.

“Along with the stance of the tax department, two recent rulings by the National Company Big Change:
The end of Five-Year Plans: All you need to know
Law Tribunal (NCLT) have come as a wakeup call to many corporates,” said senior
chartered accountant Dilip Lakhani. “In these cases, NCLT held that GAAR provisions are applicable to transactions proposed in
restructuring schemes.

Also, the tax department has turned proactive. It’s raising objections in many cases after receiving notices (on mergers) from NCLT. With
amendment to the Companies Act, the tax office now comes to know of all mergers.”

Though GAAR should apply only to doubtful transactions where there is no substance, or to deals that would not be entered into in
ordinary course of business, Lakhani said there are fears the department is resorting to GAAR to tax many transactions where there is
tax saving.

Transactions that have attracted GAAR often include merging a loss-making company with a profitable group entity, thereby enabling
the latter to take advantage of losses of the transferor company. Even though the law allows such tax reduction as long as certain
conditions are met, tax officials can, nonetheless, claim a deal was entered into purely with the objective of evading tax.

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Concerns arise as taxman invokes GAAR to question domestic deals -... https://economictimes.indiatimes.com/news/economy/policy/concerns-...

Another instance GAAR has been invoked relates to sale of capital assets where the buyer makes an immediate part payment, with the
agreement that the balance would be paid after certain conditions are fulfilled. Even if the balance payment — received after a year or
so — is exempt from tax by virtue of court or tribunal rulings, the I-T Department has taken the stand that the deal was done with the
intention of avoiding tax. As a result, it claims tax on the full amount in the first year.

Hitesh Gajaria, head of tax, KPMG India, believes GAAR has sufficient inbuilt checks and balances and will be triggered only in
exceptional cases of blatant tax avoidance. “GAAR can only be invoked where one of the main purposes of a transaction is tax
avoidance.

If companies are able to demonstrate commercial purpose (for instance, business and operational strategy) for carrying out the
transaction, and tax benefits (if any) only arise incidentally, then GAAR, even if invoked, will not sustain,” he said.

Often, deals are structured in certain ways to meet business and leverage needs. Consider a company with two subsidiaries having
valuations of Rs 500 crore and Rs 50 crore. If the investments are sold separately, the company would receive Rs 550 crore.

But if it strikes a deal with a single buyer for both investments for Rs 510 crore and executes transactions under two separate
agreements of Rs 500 crore and Rs 10 crore, the tax department may invoke the General Anti-Avoidance Rule as one of the
investments have been sold at below the fair value.

There are apprehensions that given the sweeping powers under GAAR, a whole deal would be tainted if a tax benefit emerges in an
otherwise genuine transaction, feels Amit Singhania, partner at Shardul Amarchand Mangaldas.

“With the advent of GAAR, the number of litigations will increase, as potentially, every deal — whether amalgamation or merger — can
be challenged by the tax department,” said Singhania.

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